Commonly seen as a tech-friendly hub, the U.K. is now targeting the likes of Alphabet Inc. and Facebook Inc. by introducing a digital services tax, joining the growing chorus against cash-rich tech giants.
U.K. Chancellor of the Exchequer Philip Hammond unveiled the measure in his autumn budget in London. He said the tax, which aims to raise about $500 million a year for the government, was designed to hit the largest internet businesses — not consumer or internet start-ups.
The introduction of a digital tax makes the U.K. government something of a front-runner. The European Commission is proposing a digital tax on revenue that tech companies make from areas such as ads and data, but commission members have yet to agree on terms.
“We will consult on the detail to make sure we get it right, and to ensure that the U.K. continues to be the best place to start and scale up a tech business,” Hammond said. “It will come into effect in April 2020.”
The U.K.’s tax will be aimed at big tech, affecting companies that were profitable and with annual revenue exceeding about $640 million. Although a temporary measure, it follows the chancellor of the exchequer’s comments during a speech at the Conservative Party conference Oct. 1 that the U.K. would “go it alone” if a European Union version of the tax continues to stall.
Representatives for Alphabet’s Google, Twitter Inc. and Facebook did not immediately reply to requests for comment.
Tech companies have been busy expanding in the U.K. in a bid to harness its highly skilled workforce. Alphabet’s Google is among a host of major tech companies including Snap Inc. and Apple Inc. that are doubling down on expanding their London offices, despite the uncertainty around the U.K.’s exit from the European Union.
Tension has also continued regarding how much tax these companies pay in Britain. Amazon.com Inc.’s U.K. business saw its 2017 corporate tax bill drop by about 40%, even though its profit there tripled.
Amazon U.K. Services Ltd., which provides delivery and corporate services to the company’s businesses in the U.K., booked revenue of about $2.5 billion in 2017. However, its U.K. corporate tax fell to about $5.8 million, down from about $9.5 million a year earlier. “We pay all taxes required in the U.K. and every country where we operate," an Amazon spokesman said in a statement at the time.
Google paid just $16 million in U.K. corporation tax from 2006 to 2011 on $18 billion in revenue, according to a government investigation in 2013.
Controversially, the U.K. digital tax — which will levy a 2% tax on certain business models — would target the global revenue of these tech giants and not profits, according to tax practitioners. That could make the U.K. a less attractive place for the companies to supply their services. Start-ups will not be in scope for the tax, Hammond emphasized.
The U.K. digital tax joins a number of propositions wielded by politicians and those within the tech industry, attempting to force tech giants to pay more. French President Emmanuel Macron wants the EU to use the tax revenue to help cover a Brexit-induced budget shortfall. In November, San Francisco voters will decide whether to levy an additional tax on large businesses to fund homeless services, part of an expanding effort among West Coast cities to tap cash-flush companies to offset growing income inequality.
The EU version of the tax, which can’t pass without the bloc’s unanimous support, is being blocked by countries including the Czech Republic, which argue the cost of collecting the tax would be higher than the revenue it would generate.
Russ Shaw, founder of Tech London Advocates, an industry body, said the digital services tax was “a prudent step” but “the wrong approach.”
“Tackling the digital tax question without coordinating efforts with the U.S. and EU as key global partners,” he said, “will only further entrench Britain in an isolationist position we cannot afford.”
The digital services tax was first proposed by the U.K. government in a November 2017 report. The EU followed the U.K. with its own version of the proposed tax that it would apply to digital companies with total annual worldwide revenue of about $850 million and EU revenue of about $57 million.
Several international bodies, including the Organization for Economic Cooperation and Development and the G20 group of industrialized nations, have been working on ways to crack down on corporate tax avoidance, especially by large internet and software firms.
Hammond said this multinational approach was the best option, but that negotiations in these international organizations were slow and the U.K. could not afford to wait. He said that if a better tax solution emerged from the G20 before April 2020, the U.K. would consider adopting that instead of its own policy.